What affects my Credit Score and how is it Calculated?

Credit scoring is the name that mortgage lenders use when trying to predict how ‘risky’ it will be to lend to a new borrower. Lenders have put together a number of criteria by which they can rank their borrowers in terms of potential risk. This can only ever be an estimate based on past experience, so don’t take it too personally!

Each mortgage lender has their own criteria which is, to a large extent, secret and each borrower’s criteria is likely to vary slightly. However, some things are quite constant and so it is possible to get a good idea of just how healthy your own ‘credit score’ is likely to be at any given time. Businesses such as Experian Call Credit and Equifax specialise in providing credit scores for this purpose.

Before you apply for a mortgage, especially if you have had problems with credit before, or if you have recently moved home or job, it’s worth considering a check of your credit history through one of these companies so that you can rectify any mistakes before you apply for a loan. Common errors which can affect your credit score include not being on the correct electoral role.

The single ‘credit score’ itself does not really exist, although your credit file certainly does. The file is made up of all sorts of information compiled on you every time you apply for (or sometimes even default on) a loan, miss the payment of a utility bill or credit card payment and you might have that recorded on your file. Not always, but sometimes.

It should be noted that lenders are looking to reduce risk and increase profit, so if you have never had a loan or credit card your are unlikely to have the glowing credit history you might assume you should have. Lenders want to lend and they want borrowers to borrow and repay. Never having borrowed cean, perversely, work against you when it comes to your credit score, because you have no history of reliable, constant (and profitable) repayments to view!

Most of the information used by lenders to calculate your credit score is provided by you on your application form, so make sure that the information is accurate and correct. If someone in your home has had credit problems in the past this might well be linked to your address, so be aware of that possibility.

Of course, once you have provided this information, it will be stored and accessed again if you apply for another loan. It may also be shared with other lenders or compared with information you subsequently provide to other lenders in the future, so make sure you are truthful and consistent when completing the application forms. Lying is fraud and it’s taken seriously.

Once the lender has compiled the information they need to make a decision, they will check that information for accuracy and identify any discrepancies. They will then weight each piece of data based on how important it is to their specific risk model (for example your repayment or default history) and they will then consider your current circumstances and the LTV (Loan to Value) before they decide on whether they will offer a loan and, just as importantly, on what terms.

The Financial Ombudsman Service is an agency for arbitrating on unresolved complaints between regulated firms and their clients. More detail can be found on their website: www.financial-ombudsman.org.uk